Research On Companies Of Impaired Capital

In America, one of the main reasons that the courts pierce the corporate veil isthat those companies are under-capitalized. But along with the introduction andapplication of the legal system of denying company personality, we can see that theimpaired capital is not that suitable in China. It is because that there are somedifferences between China and America about the judicial system and the companycapital system. According to the statistical data from2005to2010, we can find thatthere was case about piercing the corporate veil due to the impaired capital. This istotally different from America. That’s because for the standard of the problem that thecapital is sufficient or not, the impaired capital itself is a kind of business judgments.Compared with the certainty of the legal judgments, there is no unified standard tojudge whether the capital of the companies is sufficient or not. So the original conceptof the impaired capital should not appear in Chinese legal system as a legal concept.Shall we abandon the concept of the impaired capital just because it is not thatsuitable in China? Is it necessary to redefine the impaired capital? Through theresearch on Chinese company capital system and combined the content of its newseries of reform, I will explain why the new Corporation. Law cancels the company’sstatutory minimum capitalization and the new situation that produced after relaxingthe duration of the shareholders’ capital contribution legally to make new definition ofthe company’s impaired capital, so that it can be a legal concept which has fixedstandard and can fit the demands of Chinese localization.This paper is composed of three parts：First of all, I will do some new research on the concept and the reasons of theimpaired capital in the first part, Such as discussing the concept of capital and make anew definition of the impaired capital, that is to say, it is a strained condition betweenthe shareholders’ paid-in capital contribution and the registered capital of companywhich is the consequence of the company’s shareholders. Meanwhile, analyzing thereasons that produced the problem of impaired capital, for instance, the shareholdersdon’t contribute or contribute fully, they make false contribution, flight contribution or the period of their contribution is too long and so on.Secondly, I will analyze the transformation of the company of impaired capitaland its new risks in the second part of this paper. As the transformation, I will analyzethe rogue company and the gnomish company, and make clear that the impairedcapital is not the reason of piercing the corporate veil by Chinese company system.The shareholders just bear supplemental liability within the scope of the capital andinterest that they didn’t contribute. As the rogue company, if it pays up the capitalaccording to the company’s articles, the Corporation Law doesn’t deny its corporatepersonality just because its capital is too little. As the new risks, the reasons, such asthe shareholders didn’t contribute fully, have no effect on performing their controlpower to the company. At the same time, shareholders can also evade the restraint oftheir property attributed control power the law regulates through manipulating thepower. This reflects the risk which is from the abuse of the control power and thepower struggling among the shareholders. No matter to the shareholders or thecreditors, the establishment of the company of the impaired capital will produce hugerisk, especially to the creditors, the transaction risk is more obvious. And due to thetwo-tier tax system and the cost of information disclosure, the advantage of thecompany will also disappear.Thirdly, I will do some research on the preventive measures to the new risk. Inthe first place, as to the previous prevention, it is important to guarantee theauthenticity and timeliness of company’s information and personal information that isabout the control power. Especially public the information of the shareholders whichare also creditors at the same time. This can provide creditors with strong riskassessment. In the second place, as to the process prevention, the efficient andconvenient modern company management system will be a good method. Thesegregation of ownership and the right of management is helpful to protect thecontrollers of company from abusing their power. The reform of the modern companymanagement is a process of long-term, because restriction of the equity ownershipstructure. At last, as to the past prevention, the supplementary application of the legalsystem of denying company personality and the establishment of the company’scompulsory liability insurance system to the companies of impaired capital provide efficient past prevention for the company’s creditors.Based on the paper, I think the light spot of this paper is to break the traditionalthought to redefine the impaired capital and come to a neoteric conclusion that theimpaired capital of the company is not the reason of the denial of companypersonality in our country. In addition, the attribute of the company control power, thelegal regulation to the circumvention of abusing company control power by theshareholders who don’t contribute fully, the power struggle among shareholders, therisk analyzing of the company of the impaired capital and the doubt about theintroduction of the equitable subordination doctrine, these all have very importantsignificance.